Rate Hike Votes Three Years in the Making

Three years is a long time in financial markets. A lot of water can flow under a bridge in that time, but that's how long it's been since we last saw a member of the Bank of England's Monetary Policy Committee vote for an increase to the Bank's base rates. Martin Weale, one of the MPC members who voted for a rate rise this month, last decided that rates should move higher in August 2011 - the beginnings of the Eurozone sovereign crisis eventually put him off.

Today, the UK economy is in a lot better shape. Growth of 3.2% in the year to July - the strongest in the G10 - and the fears that to hold off on rate rises would create potential for dangerous bubbles in credit markets have been enough to move the votes of Martin Weale and Ian McCafferty to vote for a 25bps increase.

We knew this day would eventually come. To be honest, from someone who has spent most of the past ten years watching central banks, it is finally exciting to have someone stand against the consensus and make sure that these decisions are nothing more than a procession of continual Zero Interest Rate Policy (ZIRP).

Weale and McCafferty also argue that a change now allows for a "gradual and limited" increase in the base rate over the course of the next few years. That to hold off any sooner means that rates will have to move higher, faster, increasing the chances of the shock to the economy that the committee believes an early rate rise will cause.

I certainly take on the board the point that slow and steady rate rises are appropriate for an economy that is exiting the kind of balance sheet recession that has affected the global developed economy since the Global Financial Crisis. What I am unable to reconcile is the need to raise rates against the recent cut in wage growth to 1.25% from 2.5% at last week's Inflation Report and yesterday's slip in CPI from 1.9% to 1.6%.

It has become clear upon reading through this month's minutes that the Bank of England miscalculated the path of inflation. June's CPI reading unexpectedly leapt to 1.9% - the fastest rate since January - with clothing, food and transport contributing well. What was more of a surprise is the rally in core prices to 2% given the move higher in sterling since the beginning of the year. The Bank of England expected this trend to continue or at least stabilise. It has not, and yesterday's decline to 1.6% shades the viability of the decision to hike rates.

As I always end up saying at times like this, it is the Bank of England's mandate that it will feel a need to stick to. If we forget about asset purchases, quantitative easing, forward guidance and average earnings it is inflation that the Bank of England is mandated to target. CPI currently runs below the Bank's target of 2% - there is no pressure on the Bank to raise rates just yet.

Where we go from here is almost as unclear as the forward guidance set up to communicate the Bank's thoughts on interest rates. The Monetary Policy Committee is made up of nine members, all of whom exhibit differing views on the state of play in the UK economy. The fact is Weale and McCafferty are the hawks of the Monetary Policy Committee and that is widely known. Both have made noises about rate hikes in recent months but a 7-2 voting record obviously doesn't indicate a change in policy yet. We would need to see 3 more from the centre shift views as well.

Who moves next from the centre ground? Chief Economist Andy Haldane or Deputy Governor Ben Broadbent possibly. They have been less vocal on the need for a tighter monetary policy but their speeches will be closely monitored in the coming months. I think the voting split will remain 7-2 for a while and if it does, then the market reaction in the coming weeks will once again revert to be largely about UK data and whether this supports the majority or the minority. A marker has been put down today, however, and we only need three more members of the MPC to switch allegiance and we will finally have higher rates in the UK.